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RBI hikes repo rate to 5.5%, shifts stance to calibrated tightening

By CAShorts DeskPublished Updated Sources: RBI; The Hindu; Mint; Free Press Journal

RBI hikes repo rate to 5.5%, shifts stance to calibrated tightening
Illustration (AI-generated)

The Reserve Bank of India's Monetary Policy Committee on October 7, 2026 unanimously raised the repo rate by 25 basis points to 5.50%, its first hike since February 2023. It also changed its stance from neutral to calibrated tightening, ruling out near-term cuts. The FY27 inflation forecast rose to 5.2% and the growth forecast to 7.1%.

Syllabus: GS3 · Indian Economy & Growth; Prelims · Current Affairs & IR; Prelims · Economy & Social Development

Why it matters

Anyone with a home, car or small-business loan linked to the repo rate will soon pay a bigger monthly instalment or keep repaying for longer. On a Rs 50 lakh, 20-year home loan at 7.5%, passing on the full 25 basis points adds about Rs 767 a month. RBI rules make banks reset such external-benchmark loans at least once every three months, so the rise reaches borrowers quickly. The new stance sends its own signal: it tells households and markets that, for now, the next move will be a hike or a pause, not a cut. The RBI is acting early to stop price rises from spreading, even if dearer credit slows borrowing for a while.

Prelims pointers

  • Under the liquidity adjustment facility, SDF (5.25%) and marginal standing facility (5.75%) rates sit 25 bps below and above the repo rate; the Bank Rate moves with the MSF.
  • Standing deposit facility, introduced in April 2022: the RBI absorbs banks' surplus funds without collateral; its rate replaced the fixed reverse repo rate as the corridor's floor.
  • Section 45ZA, RBI Act: the Centre, in consultation with the RBI, sets the CPI inflation target every five years; 4% within a 2-6% band was retained for 2026-31.
  • Section 45ZB, RBI Act, 1934: the MPC has six members, three from the RBI and three appointed by the Centre; the Governor chairs it and has a casting vote.
  • The 'calibrated tightening' stance was earlier adopted in October 2018 under Governor Urjit Patel; it reverted to neutral four months later.
  • External benchmark: since October 2019, new floating-rate retail loans and loans to micro and small enterprises must track one, such as the repo rate, and reset at least quarterly.
  • MCLR, a bank's internal benchmark built on its marginal cost of funds, including deposit rates, covered 29.6% of floating-rate loans at end-June 2026; external benchmarks covered 68.2%.
  • Core inflation (CPI excluding food and beverages, and fuel) and diffusion indices are the RBI's gauges of whether inflation is becoming generalised.

Practise a UPSC-style question

Consider the following statements about the RBI's policy corridor after its October 2026 decision:

1. The standing deposit facility lets the RBI absorb surplus liquidity from banks without providing collateral.

2. The Bank Rate is aligned with the repo rate and now stands at 5.50%.

3. The marginal standing facility rate forms the ceiling of the corridor and now stands at 5.75%.

Which of the statements given above is/are correct?

  1. (a) 1 and 2 only
  2. (b) 2 and 3 only
  3. (c) 1 and 3 only
  4. (d) 1, 2 and 3
Show the answer

Answer: (c) 1 and 3 only

1 is correct: the SDF, the floor of the corridor (now 5.25%), absorbs liquidity without the RBI having to give government securities as collateral. 2 is incorrect: the Bank Rate moves with the MSF rate and stands at 5.75%, not with the repo rate. 3 is correct: the MSF rate, 25 basis points above the repo rate, is the corridor's ceiling at 5.75%.

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